Primark Owner Swayed by Shifting Pound

A Primark store in Leicester, U.K. Owner Associated British Foods reported a strong rise in half-year profits, boosted in part by the Brexit-hit pound.
Photo:
Zuma Press

Food-to-fashion firm Associated British Foods PLC both benefited and suffered from the weakness of the U.K. pound following last year’s vote for Brexit.

While the drop in the pound had an overall positive impact on the company’s adjusted operating profit in the six months ended March 4, the margin at fashion chain Primark declined. Primark generates around half of the firm’s earnings before interest and taxes.

“This indicates the breadth of ABF’s business. For us, the devaluation of the pound is both a positive and a negative,“ said Finance Director John Bason on Wednesday in an interview with CFO Journal.

The value of the British currency in the aftermath of the June 23 vote declined by around 17% against the U.S. dollar before recovering Tuesday, on the heels of the government’s announcement of a snap election in early June.

ABF owns a group of businesses in the grocery, sugar, agriculture, ingredients and retail sectors.

At Primark, three-quarters of wholesale purchases are made in U.S. dollars, Mr. Bason said. “The U.S. dollar is the currency that most of the garment industry uses,” he said.

Other parts of ABF’s business, including the British sugar business, benefited from the pound’s depreciation. Most sales contracts for sugar are negotiated in euros, thus helping ABF, said Alex Smith, a consumer equity analyst at Barclays in London.

“ABF is highly sensitive to [the] pound/dollar [exchange rate] and euro/dollar [exchange rate] from a translation and a transaction perspective,” according to a note from Jefferies Group.

“The strength of the U.S. dollar has eaten into margins at Primark, as a result of the rising cost of purchasing goods, hitting performance at the biggest contributor to ABF’s profits,” said Nicholas Hyett, an equity analyst at Hargreaves Lansdown in London, in a note.

Given that ABF generates more than two-thirds of its revenue overseas, the weaker sterling boosted performance in other parts of the company, Mr. Hyett said.

ABF on Wednesday reported adjusted operating profits of £652 million ($837.6 million) at the half-year stage, up 36%, with currency effects accounting for 13% of the rise in profit.

The firm hedges its Primark purchase orders around six months in advance and doesn’t intend to change that, Mr. Bason said.

“We expect the full effect of sterling weakness against the U.S. dollar on Primark's purchases to result in a greater margin decline in the second half because our currency hedges were at more advantageous exchange rates than the first half,” Mr. Bason said during an analyst call.

ABF doesn’t plan to increase prices at its Primark subsidiary for the second half of the financial year, said Mr. Bason.

“They are more prepared to use their sourcing power rather than to pass higher prices on to consumers,” Mr. Smith said of ABF.

Currency effects will pressure the Primark margin through the first half of 2018, he said.

The retailer said it aims to open 29 stores in the current fiscal year, largely outside the U.K.

Of key concern to analysts is the expansion in the U.S. Primark currently operates seven stores in the country. “Longer-term, the group is still reliant on the rollout of Primark stores in the U.S.,” Mr. Hyett said. “Progress here is slow, but early signs are promising.”

However, Primark has suffered from a lack of brand recognition in the U.S., Mr. Smith said.